Reverse Mortgage Budget 2007-08 Offers A Respite To Senior Citizens

Sheetal Sanghvi ( Advocate - Legasis Services Pvt. Ltd) — 1173033000

The latest move made by the Finance Minister to support senior citizens in the second dawn of their life by introducing the Reverse Mortgage product is seen as a highly laudable initiative. The Finance Minister formally announced the Reverse Mortgage Scheme in this years budget 2007-2008.

The joint family system is fast disintegrating, with many of the children having migrated or living away from their hometowns for work or various other reasons. The chief worry of the elderly is that they will outlive their savings and be a burden on their children, not having saved enough for their retirement. Now you need not worry about giving up the cosy comfort of your homes and neighbourhood so as to move at this stage of your lives into a new unfamiliar surrounding or an old age home. You can live with dignity in your own homes where you have dwelled all your life and earn from it too. It sounds too good to be true isnt it? One would ask how can we do it? The answer is simple, by taking a reverse mortgage. In this Article we shall elucidate on reverse mortgage, how its works and its utility as an unconventional but useful retirement tool.

Today, since improved health care and better nutrition has increased the life expectancy of people from 60 years to 75 years and beyond, many of Indias middle class known as asset rich generally have megre savings at the time of their retirement. This means that most of their equity is tied in their homes. For a number of years, policy makers and retirement specialists have been analyzing various options to generate retirement income, but not many satisfactory avenues are available.

According to the 1991 census reports, India has an estimated 314 million workers, of which a mere 11% are covered by the formal pension system. For the majority, personal savings (which are insufficient to meet their financial needs) are their only source of retirement income. Saving through a pension policy of a life insurance company is another option. However, the insurance company mostly only quotes the premium required to be paid at the date of ones retirement and not before that for getting a life pension of, say, Rs. 1,000 per month after retirement. The safest option of recurring deposits with Banks, though it gives reasonable returns, its tax incentives and taxability of income makes it unpopular. With no attractive direct methods of saving for retirement available, reverse mortgage seems to be the only other option for the elderly.

But what is reverse mortgage? Most traditional mortgages require the mortgagor to make monthly payments towards both principal and interest or only towards the interest thereby repaying the entire mortgage amount at the end of the repayment period. Reverse Mortgage is exactly the opposite of a forward mortgage, hence the name. Rather than you paying a monthly sum of money to a mortgage company, a mortgage company pays you installments. Your house is kept as a collateral security with the mortgage company, which the company can take possession of only after your lifetime and the lifetime of your spouse. Thus, by taking a reverse mortgage you enjoy the cash, the safety and security of your own home and are not even required to pay a penny towards the repayment.

As per the guidelines laid down by the National Housing Board, Dewan Housing Finance Corporation, is the first in India to launch the reverse mortgage scheme called Saksham. To be eligible for a reverse mortgage, the borrower should be 60 years and above, living in a self owned, not ancestral property and which is free from any other encumbrance. However property owned via a registered will would also suffice. The amount shall be paid depending on your age, the value and condition of the property and the prevailing interest rate. Generally speaking, the higher the age of the retiree, the higher the value of the house, and the more the money available. So if you fit into this age bracket, and are living in your own homes, you can heave a sigh of relief since you are the lucky few to have found the genie in the bottle in the form of reverse mortgage, which shall take care of all your old age worries such as finances etc. For eg. Assume that you have a house worth Rs. 50 lakh, you are above 65 years and you are eligible to get a loan for 15 years. Suppose you are eligible to unlock 60 percent of the value of the house, then you can, receive Rs. 30 lakh through a reverse mortgage.

Besides the obvious, the other advantages of taking a reverse mortgage are as enlisted below.

Reverse Mortgage can supplement your retirement income. This equity reduction may be preferable to lowering your standard of living at this stage of your life due to insufficient monthly income. Secondly, the lender can only sell off your property to recover the loan after both you and your spouse have expired, and transfer any amount received in excess, from the sale, to your heirs, who in any case can retain the property by paying the loan amount. Thus this does not take away your right to bequeath your property to your heirs. Also due to the ever burgeoning real estate value in India, the possibility of the house value appreciating more rapidly than the mortgage loan increasing is greater. The borrowers will never be evicted. The older you are the easier it is to get the reverse mortgage loan due to reduced life expectancy. Your credit history too is not necessary. It is a non-recourse loan, which means that the banks/ financial institutes can never come after you or your estate for repayment of the loan. The lender can only receive payment of the loan from the value of the home. Another advantage is at the macro level, implementation of the reverse mortgage scheme could reduce the burden on the government and the employers, paying pensions, in the public or private sector, and would thus be an indirect measure to bring in pension reforms. Another advantage is that the money by reverse mortgage can be received either as a lump-sum payment, fixed monthly payments, a line of credit or a combination of any of the above, depending on your requirement. This takes care of your hospital bills etc if you fall ill at this stage of your life and have no savings, by you availing the line of credit etc. People may at first show some reluctance to reverse mortgage but they can rest assured. Some of the issues regarding this scheme which, new in India, but quite popular in the US and other developed countries are the operational, legal and emotional issues. However this roadblock can be removed by putting necessary regulations in place. This would require new laws apart from amending the existing ones such as the NHB Act, RBI Act, etc. Financing fees, insurance, maintenance, property taxes etc are the other minor issues which can be ironed out. Though globally reverse mortgage is exempt from tax, in India the taxation issue is not clear. However, in my opinion since the payments are treated as a loan which needs to be repaid and not an income, it should not attract taxes (as is the case in US). The other advantages of reverse mortgage are that products like Saksham allows you and your spouse to live in your property as long as you are alive, without the fear of eviction even after the tenure expires.

To sum up reverse mortgage in short, it is a social security benefit especially designed for the senior citizens, enabling them to live a life of dignity in their own homes till the end of their lives and earning from it too. By taking a reverse mortgage, the old have at this stage of their life found Alibabas cave with its hidden benefits and treasures, waiting to be explored by them.

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Reverse Mortgage Budget 2007-08 Offers A Respite To Senior Citizens